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Zynga Pessimists Bet on Additional Losses by Week's End

Weekly put volume swells on ZNGA

by 1/30/2013 12:48 PM
Stocks quoted in this article:

Zynga Inc (NASDAQ:ZNGA - 2.58) has seen an influx of bearish betting today, as approximately 8,200 puts have changed hands so far -- more than double the equity's expected intraday volume. Garnering notable attention has been the 2/1 2.50-strike put, where close to 4,100 contracts have traded at a volume-weighted average price (VWAP) of $0.06.

Upon closer inspection, it looks as though the majority of these near-the-money puts were exchanged at the ask price, signaling buyer-fueled activity. Since this option currently holds fewer than 3,000 contracts -- along with the fact that implied volatility has soared more than 40 percentage points during the course of the session, it's likely that at least some of today's volume is comprised of new positions. In this scenario, speculators are counting on ZNGA to fall below $2.44 (strike price less the VWAP) by this Friday's closing bell, when these weekly options expire. Even if the stock fails to do so, the most these put buyers risk losing is the initial premium paid.

From a broader sentiment scope, this preference for puts over calls is a deviation from ZNGA's recent trend. The equity's 50-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio checks in at 8.72, with traders buying to open nearly nine calls for every put during the past 10 weeks. This ratio is just 5 percentage points shy of an annual peak, meaning speculators have rarely picked up calls over puts at a faster pace during the last 52 weeks.

However, as today's options activity indicates, the short-term crowd remains unconvinced of the online game guru's future prospects. Schaeffer's put/call open interest ratio (SOIR) of 0.74 ranks higher than 94% of other such readings taken within the past year, conveying near-term traders are much more bearishly aligned toward ZNGA than usual.

The equity has taken quite a beating over the past 12 months, having shed more than 75% on year-over-year basis. However, ZNGA has shown some signs of life in recent weeks, recovering more than 23% since tagging a record low of $2.09 on Nov. 12. At last check, the equity is down 0.8% to trade at $2.58. It remains to be seen whether the shares will fall low enough over the next few days to reward the aforementioned near-term bears.


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